Ameriprise to Kill A-Shares and 12-b1 Fees, CEO Says

Another major independent broker-dealer plans to prohibit sales of A-share mutual funds and collection of 12b-1 fees by itself and its almost 10,000 brokers in order to comply with the Department of Labor’s new conflict-of-interest rule.

Ameriprise Financial will sell only lower-cost institutional-class shares of funds in clients’ fee-based advisory accounts, Chief Executive James Cracchiolo said Wednesday. The policy will affect both retirement and ordinary accounts, even though the DOL has jurisdiction only over retirement products.

Ameriprise, which also sells annuities and other insurance products, will implement its new policy early next year in time for the April 2017 fiduciary rule deadline. If funds do not offer institutional-class shares that are more efficient for investors, it will have its brokers waive A-class shares and marketing fees in fee-based advisory accounts, Cracchiolo said.

Brokers will still be able to use A shares in commision-based brokerage accounts if they sign best-interest contracts with customers that the DOL requires. The contracts expose firms and brokers to liability costs but they permit class-action lawsuits, and like others in the brokerage industry Ameriprise has been steering customers into fee-based rather than commission accounts.

Of Ameriprise’s $453 billion in client assets under management, around $180 billion—or 40%—are in fee-based accounts.

Cracchiolo would not specify the effect of its A-share policy on revenue, but said Ameriprise and its brokers will find new products and lower costs to mediate revenue hits.

“There will be an impact, but we hope to offset it through adjustments to our business model, as well as costs,” he said on a conference call with analysts to discuss Ameriprise’s second-quarter results. The financial services giant reported a 13% decline in net income from the previous year’s quarter, including a 2% decline in revenue in its Advice and Wealth Management unit.

The adjustments are unlikely to include dramatic shifts in funds and other asset management products that customers can buy. Analysts expect the DOL rule to create some hard-knuckled negotiations between brokerage firms and asset management companies over how much the fund companies pay to buy “shelf space” on brokerage platforms.

”We don’t see a radical shift,” Cracchiolo said of products in its brokers’ quiver.

Losing 12-b1 fees, which reward brokers for fund sales for the entire period that a customer owns the fund, will primarily affect Ameriprise’s independent brokers, Cracchiolo said. As of June 30, Ameriprise had 7,638 so-called franchise advisors compared to 2,082 brokers that are direct employees.

Amerirpise itself keeps only a small part of the 12b-1 fees that fund companies pay for so-called distribution of their products, Cracchiolo said.

Most large brokerage firms that have employee broker sales forces have alredy shifted to selling lower-cost institutional shares. UBS Wealth Management was the last of the four wirehouses, which also include Morgan Stanley, Merrill Lynch and Wells Fargo Advisors, to shift to institutional shares in 2014.